Brussels gives Athens thumbs-up November 12, 2007

European Commission report sees economy growing and deficit shrinking again from next year

The European Commission is expecting growth in Greece to accelerate and the deficit to remain below the threshold of 3 percent of gross domestic product, according to its regular fall report published yesterday.

Economic and Monetary Affairs Commissioner Joaquin Almunia yesterday presented this first report on Greek public finances to take into account the revised GDP data. The Commission forecasts that the deficit this year will close at 2.9 percent and decline to 1.8 percent in 2008 and 2009. The original forecast had been that the deficit would come to 1.7 percent this year, but the recent GDP upward revision by 9.6 percent has changed that.

Commenting on the report, Economy and Finance Minister Giorgos Alogoskoufis said that “it is very significant that the Commission recognizes the efforts Greece is making to reduce its fiscal deficit further, aiming at complete fiscal rehabilitation.”

The deficit’s increase to 2.9 percent from 2.5 percent in 2006 is temporary and due to three factors, namely the sizable, retroactive adjustment of the Greek contribution to the EU budget due to the revision of GDP, the measures taken in the aftermath of devastating forest fires in August and the cost of the general election.

It is hoped that none of these will recur in the coming years, and the Commission expects the deficit to drop to 1.8 percent in 2008 and to 1.75 percent in 2009. The debt will fall to 93.7 percent of GDP this year, to 91.1 percent next year and to 88.8 percent in 2009.

Surprisingly, the Commission forecasts that the expenditure for the fire victims and the elections will have a positive impact on another index, GDP growth, which is expected to accelerate in the latter half of 2007. Brussels also expects growth to maintain its momentum in the next couple of years, with public investment being the main driver.

The economy this year has been characterized by the gradual decline of private investment, after the “excellent momentum” of 2006, and by a drop in private consumption. Nevertheless, the GDP growth rate will show a “marginal slowdown” from 4.1 percent this year to 3.8 percent in 2008 and 3.7 percent in 2009, under the burden of a further slowdown in private and public consumption and in private investment, with public investment continuing to be the driving force behind growth.

“The economy’s growth rate, according to the Commission report, will continue to be much higher than the eurozone average in 2008 and 2009, underpinned by a strong increase in investment and exports,” said Alogoskoufis, who is in the US.

It should be noted, however, that the Commission has been steadily forecasting a slowdown in Greek growth in recent years and has always been proven wrong. For the coming years, as a result of developments in consumption and investment, the Commission predicts a “slight” decline in imports and exports of goods, while expecting “dynamic” growth in exports of services, led by tourism. Goods exports, Brussels notes, will be negatively affected along with the overall competitiveness of the economy from the nominal rises in wages which “push the unit labor cost clearly above the eurozone average” up to 2009.

The report further sees a moderate increase in inflation due to the rising price of oil and “the increase in indirect taxation of oil byproducts.” The employment growth rate will see a marginal slowdown, from 1.6 percent in 2006 and 2007 to 1.4 percent in 2008 and 2009. The gradual decline of unemployment will continue, falling from 8.4 percent this year to 7.9 percent in 2008 and 7.5 percent in 2009.

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